Wage growth may be disappointing, but workers are getting more expensive

In the past several months as economists have tried to judge how much "slack" remains in the labor market, the lack of wage growth has been pointed to as a sign there is still a ways to go before we're at a "full employment" inflection point that would, among other things, prompt the Federal Reserve to raise interest rates.

Headline measures of wage growth like average hourly earnings and the employment cost index, for example, are still underwhelming, with average hourly earnings rising 2.2% over the prior year in September.

But in a note to clients on Thursday, BNP Paribas economist Paul Mortimer-Lee looked at the recent uptick in real wages— that is, wages adjusted for inflation — and worker productivity. And what Mortimer-Lee found was an increase in real wages that was outpacing an increase in productivity.

This means that on an inflation-adjusted basis, employers are paying more for workers who are getting less done.

Here's Mortimer-Lee:

Chart 3 shows that real wage growth has picked up, but that productivity has failed to keep pace; labour is becoming more expensive in real terms to employers. With many firms having to face activist shareholders and with many shouldering high debt burdens, the natural reaction to a profit squeeze is to cut labour costs.

BNP Paribas

And so with employees maybe not seeing the nominal wage gains that draw headlines, it is becoming more expensive for employers.

But with uncertainty about the global economy seeming to be dominating the thinking of economists and business leaders in the US and abroad, Mortimer-Lee thinks a slowdown in hiring could be coming.

"The first stage in a cost containment plan is to restrict hiring; the second is actually to start to shed jobs," Mortimer-Lee wrote.

"Initial jobless claims do not show any signs of a step-up in firing, but recent corporate announcements suggest there may be job cuts in the pipeline. We think there is a good chance the increased worries about global growth have caused firms to at least scale back on hiring."